Global Market Comments
June 12, 2020
Fiat Lux
Featured Trade:
(WHEN THE BILL COMES DUE)
(SPY), (TLT), (GD), (USO), (HTZ), (JCP)
Global Market Comments
June 12, 2020
Fiat Lux
Featured Trade:
(WHEN THE BILL COMES DUE)
(SPY), (TLT), (GD), (USO), (HTZ), (JCP)
This was a top you could see coming a mile off. Now, the correction for the greatest rally in stock market history has begun. Will it be the greatest correction in history?
It could be.
It was the awful news that the Coronavirus is starting to run away again that started the panic. New cases in Texas and Arizona are growing so fast that the local hospital systems are getting overwhelmed once again. The Armageddon scenario is back on the table once again.
You knew we were in trouble when the stocks of bankrupt companies, like Hertz (HTZ) and JC Penny (JCP) started doubling in a day, even though they have no equity value whatsoever. They were bid up simply because they had low single-digit prices, as bankrupt companies always do.
They were bid up by greater fools and the market just ran out of them.
It wasn’t just equities that got slammed. Oil (USO) suffered a horrific day, down 8.2%. because of burgeoning inventories leftover from a dead-in-the water economy. Bonds rocketed three points and are up an eye-popping 11 points from last week. Even gold (GLD) failed to move, held back by widespread margin calls.
It seems we have returned to the terrors of February-March, the down 2,000 points a day kind. There was barely a rally all day. It basically went straight down. How much more is there to go? Let’s look at the obvious targets in the S&P 500 (SPY) and the distance from the Monday top.
$299 – Down 7.7% from the top – the 200-day moving average and top of the April - May double top
$288.74 – Down 10.9% - The 50-day moving average
$272 – Down 15% - bottom of the April - May double bottom
$262 – Dow 19.4% - Top of the initial rally off the March 23 bottom and the level where a new bear market is declared. Two bear markets in two quarters?
$219 – Down 32.6% - the March 23 low gets retested.
There is quite a lot to chew on here. In the end, it will depend on how much the first Corona wave ramps up after a far too early re-opening. Even if there are no further shutdowns of the economy, a world where consumers are too afraid to leave their homes doesn’t generate a lot of growth or earnings.
When the president says things are great, but you see 5% of normal traffic in the local shopping mall, you want to run a mile.
Forget about the second wave, we haven’t even gotten out of the first wave yet. Corona deaths topped 114,000 today. We could hit 250,000 by August, not a great mall traffic generator.
If the selloff continues, and it probably will until the Q2 earnings are published starting in mid-July, then this is the dip you want to buy. For if the lows hold, we will be at the beginning of a 400% move in the main indexes over the next decade.
To get the depth of the argument why this will happen, please read about the coming Roaring Twenties and the next American Golden Age by clicking here.
Here is what you want to do on this move down:
*Stocks - buy big dips
*Bonds – sell rallies aggressively
*Commodities - buy dips
*Currencies - sell US dollar rallies
*Precious Metals – buy dips
*Energy – stand aside
*Volatility - sell short over $50
*Real Estate – buy dips
And buy LEAPS (Long Term Equity Anticipation Securities), lots of LEAPS. This is where traders have been picking up 500%-1,000% returns this year.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
May 14, 2020
Fiat Lux
Featured Trade:
(TEN UGLY MESSAGES FROM THE BOND MARKET),
(TLT), (TBT), (USO), (GLD), (GS), (SPY)
The global bond markets have been screaming an ugly message at us loud and clear, and I’m afraid that it’s not a positive one.
Amazingly, US Treasury bonds have soared early this year, taking the (TLT) up a stunning 40 points.
In the meantime, stocks have suffered the sharpest crash in history, plunging ten times faster than the worst days of the 1929 crash, down 37%.
The implications for your investment portfolio are so momentous and far-reaching that I am going to have to list them one by one.
Read them and weep:
1) The US is in a severe depression.
2) The pandemic is not even close to ending. US deaths topped 85,000 yesterday and may triple from here.
3) The presidential election has become a major source of instability, and no one has any idea of how this will all end. Trump is currently trying to bankrupt the US Post Office to frustrate mail-in voting.
4) The immigration crisis is reaching a humanitarian crisis of epic proportions. It has become our Syria, which landed four million immigrants in Europe.
5) The stock market is in the process of crashing…. Again, failing dramatically at the 200-day moving average. That “Sell in May” thing may work big time this year.
6) The Trump trade is toast. Financials, commodity, energy, coal, and industrial stocks are leading the charge to the downside.
7) Oil (USO) is in free fall and may go negative again, another classic recession predictor. For the first time in history. Most small and medium-sized energy companies will go under. Coal has dropped to a historic low of 19% of US electricity production, less than total alternative sources, and is never coming back.
8) Bitcoin is rocketing, up an eye-popping 100% since the crash began. This has become the big hot money trade of 2020 in addition to that other great flight to safety trade, gold (GLD).
9) The US dollar (UUP) is flatlining, wiping out the growth of the foreign earnings of US multinationals. Foreign economies are collapsing even faster than ours, taking their interest rates and currencies lower at warp speed.
10) The unemployment rate, now at all-time lows, not bottom out for months. The great irony here is that while the president vociferously campaigned on an aggressive jobs program, he may well preside over the biggest job losses in history. The Fed is targeting total unemployment of 52 million, worst than the Great Depression.
For more on this, please read my recent piece, “Why You Will Lose Your Job in the Next Five Years and What to Do About It” by clicking here.
There is another alternative explanation to all of this.
A certain Monty Python sketch about a parrot comes to mind.
That all we saw a giant short squeeze in the hedge funds’ core short position in bonds for the umpteenth time, and that we are almost done.
Hedge funds have grown in size to where they are now the perfect contrary market indicator. It is the classic “Too many people in one side of the canoe” trade. A Yogi Berra quote comes to mind; “Nobody goes there anymore because it is too crowded.”
There are other structural factors at play here which are hard to beat. For more on this, please read my opus on “Why Are Bond Yields So Low” by clicking here.
Global Market Comments
April 24, 2020
Fiat Lux
Featured Trade:
(APRIL 22 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (INDU), (GILD), (NEM), (GOLD), (USO),
(SOYB), (CORN), (SHOP), (PALL), (AMZN)
Global Market Comments
April 21, 2020
Fiat Lux
Featured Trade:
(OIL CATACLYSM)
(USO), (XLE)
I spent the day trying to charter a 500,000-tonne oil tanker.
No luck.
If I had found one, I could have bought oil at the close of the market today at negative -$37.78 a barrel and then immediately resold it for June delivery for $21, generating an instant $57.78 a barrel profit. At 7.33 barrels a metric ton that gives me a $211 million profit. All I have to do is keep the oil for a month. Big hedge funds are doing this right now.
When I toured Australia in February, I warned investors that crude would fall from $80 to $10 by 2030, which many called extreme. I warned them to get out of all energy investments immediately, as I have done with you for the past several years. It is an industry that is going the way of the buggy whip maker.
Instead, we saw a move from $80 to negative -$37 in two months. They must think I’m some kind of idiot, clueless about the functioning of this important commodity market, despite having invested and worked in the industry for five years.
Of course, the wild prices are a product of the futures market, where financial derivatives outnumber the underlying physical market by 100 to one. Anyone who buys here today has to take delivery by 2:30 EST on Tuesday. With all the world’s storage and shipping already committed that is impossible. You literally can’t give oil away right now.
All transportation use of oil has virtually ceased. Most airlines are grounded, no ships are sailing, and nobody is driving anymore. Of the world’s potential daily oil supply, we have crashed from 100 million b/d to 65 b/d in two months. It is a move unprecedented in history.
Throwing gasoline on the fire are 16 supertankers which sailed from Saudi Arabia but for which there are no buyers.
This panic is happening in the face of Cushing, Oklahoma’s storage capacity which is now at 61 million barrels and could be at its limit of 78 million barrels in a couple of weeks. Then where does the Texas tea go?
Since June futures are still trading at $21, I believe this carnage is due to the future expiration and should pass in a few days. But unless more storage shows up out of the blue, or the industry shuts in production of 35 million b/d, the Armageddon in the futures market will become a monthly affair.
All eyes are now on the United States Oil Fund (USO), which liquidated all its May oil contracts two weeks ago to avoid precisely this kind of debacle. All longs were rolled forward to June contracts, which expire on May 19, and into July.
(USO) now owns one-third of all June oil contracts. Some $1.5 billion poured into the (USO) last week, which then immediately dropped in value by half.
I know this sounds insane, but if you bought the (USO) at the Monday close of $3.75 and it returns to the $5.00 where it was trading last Thursday and oil was trading at $25 you should be able to make a quick 33% on your money in a few days.
I wouldn’t let this trade grow hair on it. I’ll be selling on the first rally. That’s why I’m only going with a 5% position instead of the usual 10%. Now is not the time to get greedy in the oil market.
Eventually, supply and demand will come into balance from a combination of production cuts and demand increases from a recovering global economy. Best guess is that happens in July or August at the earliest. OPEC has already cut production by 10 million barrels a day for two months and 8 million b/d for the rest of the year. After that, oil could trade back as high as $40 a barrel.
If oil stays this low for too long, the geopolitical implications are immense. There will be a second Russian Revolution, which depends on crude sales for 70% of total government revenues.
Saudi Arabia will go up in flames and the royal family will flee to Geneva, Switzerland where their money is, leaving 34 million citizens to perish. What population did the country support before the post-war oil industry took off in 1950? About 4 million. I remember Saudi Arabia in the 1960s and it was not a pleasant place. People walked barefoot on 150-degree sands.
But I diverge.
At some point, another trade of the century on the long side of oil is out there. But the price of being early is high.
Global Market Comments
March 23, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or WELCOME TO THE GREAT DEPRESSION),
(INDU), (SPY), (GS), (MS), (FXI), (USO), (TSLA)
The neighborhood is alive with power tools.
These are the implements that were given as Christmas presents to dads years ago. But to afford life in the San Francisco Bay Area said dads have to work 12 hours a day and weekends. Now, suddenly they have all the free time in the world and those ancient gifts are coming out of decade-old original packaging.
I’ve noticed something else about my neighborhood. People have suddenly started to turn gray. Beauty salon appointments have been banned for weeks, not designated essential businesses.
The GDP forecasts released by Goldman Sachs (MS) last week have been turning a lot of other people gray as well. Q1 is thought to show a -6% annualized shrinkage and Q2 is expected to come in at -24%. The unemployment rate will peak at 9%. Not to be outdone, Morgan Stanley (MS) cut their Q2 forecast to -30%.
That means America’s GDP will shrink to the 2016 level of $18.62 trillion, down enormously from today’s $21.5 trillion. Yes, three years of economic growth will be gone in a puff of smoke. These are far worse than the last Great Recession when the worst two quarters came in at -2% and -8%. That’s double the worst figures of the Great Recession.
In the meantime, vast swaths of the American economy are moving online, never to return.
The good news is that growth will return at a historic 12% rate in Q3. That sets up an exaggerated “V” for the stock market. How soon should you start buying stocks if this economic scenario plays out? Probably a month, if not weeks, but only if you have the courage to do so.
The numbers from China (FXI) this week are very encouraging, showing no increase in new cases. In February, they enacted the kind of severe lockdown which California enacted a week ago.
Hopefully, that means we will get the Chinese results in a month or two. But the problem is that these are Chinese numbers that may be intended more to please the government than shed light on the truth.
The first real look we get at the effectiveness of lockdown may be in Italy in a few weeks, which has been quarantined since February.
In the US, the states have abandoned all hope of help from Washington and are leading the charge with the most aggressive measures. In California, it is now illegal for 40 million people to go outside unless it is a trip to the grocery store, the pharmacy, or the doctor.
The Golden State is now on a WWII footing. Tesla (TSLA) is switching production to ventilators. The state national guard is setting up field hospitals in parks. I am growing my own victory garden in the back yard.
The state is seeking to double the number of hospital beds to 20,000 within weeks. It just bought an entire hospital in Oakland, Seton Hospital. It went bankrupt last year and the administrators couldn’t give it away. The state i taking control of abandoned college dormitories and leasing empty hotels and cruise ships.
I expect food rationing to hit in a month. The distribution system is strained but working now. It may start to fail in April or May when large numbers of workers get sick.
The good news is that shelter in place should work, possibly by May. Kids are out of school until August.
With Trump refusing to put the entire country on lockdown that raises the specter of those in red states dying, while those in blue ones live. The big blue states of New York, California, New Jersey, Connecticut, and Illinois were the first to order shelter-in-place and will certainly see lower and sooner peaks in disease and fatalities.
And guess who has a one-month supply of Chloroquine, along with antibiotics widely believed to be a cure for the Coronavirus? That would be me, who bought them to fight off malaria for my trip to Guadalcanal six weeks ago. I was planning on going back in June to collect more dog tags for the Marine Corps, so I have an extra supply. As long as you can read, I’ll still be writing.
There is one more unexpected aspect of the pandemic and the shelter-in-place orders. I expect a baby boom to ensue in about nine months, thanks to all this enforced togetherness. The US birth rate has been falling for decades and is now well below the replacement rate. It’s about time we found a way to turn it around. Just don’t count me in on this one. I already have five kids.
So, you’re still asking for a market bottom.
The futures in Asia are limit down as I write this, just above the Dow Average 17,000 handle (INDU), thanks to the Senate failure to pass a virus rescue bill. Near 15,000 seems within range, down 49% from the February high. Modern history is no longer relevant here. We have to go back to 1929 to see numbers this extreme. I’ll be doing the research on that in the coming days.
The 1987 crash was already revisited a week ago, with a 3,000-point plunge in the Dow Average, or 12%. Some 33 years ago, we saw a 20% single day haircut, which I remember too well. This is with the Federal Reserve throwing everything at the stock market but the kitchen sink. I never thought I’d live long enough to see another one of these.
The Fed took interest rates to zero to stave off a depression, but the stock market crashes in overnight trading anyway. That brings the total to 150 basis points in cuts in five days. The Treasury is to buy an eye-popping $700 billion in mortgage securities to clear out the refi market for the first time in a decade. The Fed has just fired its last bullets to save stocks.
Goldman Sachs is targeting 2,000 in the (SPX), down 10% from here and 41% from the top. That is a 14X multiple on a 2020 S&P 500 earnings decline from $165 to $143. Yes, it’s just a guess. Investors could care less now about fundamentals or technicals. Cash is king.
Oil (USO) is headed for the teens. Saudi Arabia is ramping up production to a record 13 million barrels a day. The recession is collapsing US demand from 20 to 15 million b/d, half of which is consumed by transportation.
Russian national income has just collapsed by 75%. Will there by a second Russian Revolution? The 3% of the US market capitalization accounted for by energy stocks will drop below 1%. Fill her up! Avoid energy, even though some are going for pennies on the dollar.
The only data point that counts now is the daily real-time Corona tally of cases and deaths from Johns Hopkins, (click here). All other economic data is now irrelevant. Right now we are at 335,997 cases worldwide and 14,641 deaths. The US is at a frightening 33,276 cases as of writing.
Insider buying is exploding, with CEOs picking up their own stocks at 50%-70% discounts. Charles Scarf, president of Wells Fargo, just bought $5 million worth of (WFC) down 52% from the recent top. This is a legendary indicator that we may be within weeks of a market bottom.
The New York Stock Exchange closes its floor trading operations last week after several members tested positive for the Corona virus. Online trading will continue, where 95% of the business migrated years ago. It’s really just a TV stage now.
It’s all about hedge funds, triggering the massive volatility of the past month. They have been unwinding massive positions with up to 13X leverage in illiquid markets that can’t handle the massive volume.
When the last hedge fund is liquidated, the market will go up and the (VIX) will collapse. They may have started and the (VIX) plunged an incredible 25 points in hours.
Trump asked states to keep unemployment data secret to minimize market impact. Just what we need, less information, not more. The Weekly Jobless Claims were a bombshell, adding 70,000 to 271,000, the sharpest increase in a decade. Look for far worse to come in coming weeks as whole industries are shut down, and state unemployment computers explode from the weight of applications. Jobless Claims over 2 million are imminent!
Existing Home Sales soared by a stunning 6.5% in February, a 13-year high. The West saw an amazing 17% increase. The median home price jumped by 8% YOY. While the data is great, it’s all pre-Corona. It is illegal for people to go out to look at homes in many states, and no one wants to sell to keep strangers out of the house.
When we come out on the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates at zero, oil at $20 a barrel, and many stocks down by three quarters, there will be no reason not to.
My Global Trading Dispatch performance has had a great week, thanks to the collapse in market volatility, pulling back by -8.22% in March, taking my 2020 YTD return down to -11.14%. That compares to an incredible loss for the Dow Average of -37% at the Friday low. My trailing one-year return was pared back to 31.68%. My ten-year average annualized profit shrank to +33.56%.
I have been fighting a battle for the ages on a daily basis to limit my losses. My goal here is to make it back big time when the market comes roaring back in the second half.
My short volatility positions have largely recovered. I shorted the (VXX) when the Volatility Index (VIX) was at $35. It then went to an unbelievable $80 before falling back to $55. I was saved by only trading in very long maturity, very deep out-of-the-money (VXX) put options where time value will maintain a lot of their value. Now, we have time decay working in our favor. These will all come good well before their one-year expiration.
At the slightest sign of a break in the pandemic, the economy and shares should come roaring back. Right now, I have a 70% cash position.
On Monday, March 23 at 7:30 AM, the Chicago Fed National Activity Index is out.
On Tuesday, March 24 at 9:00 AM, the New Home Sales for February are released.
On Wednesday, March 25, at 7:30 AM, US Durable Goods for February are published.
On Thursday, March 26 at 7:30 AM, Weekly Jobless Claims are announced. The number could top 1,000,000. The final read on Q4 GDP is announced, although it is ancient history.
On Friday, March 27 at 9:00 AM, the US Personal Income for February is printed. The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I will be in training doing daily ten-mile hikes with a 50-pound backpack. I will be leading the Boy Scouts on a 50-mile hike at Philmont in New Mexico. I expect the epidemic to peak well before then and normalcy to return.
Shelter in place will work. Please stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
March 19, 2020
Fiat Lux
Featured Trade:
(INVESTING ON THE OTHER SIDE OF THE CORONA VIRUS),
(SPY), (INDU), (FXE), (FXY), (UNG),
(EEM), (USO), (TLT), (TSLA)
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